Cash-flow budgets can be difficult to create for a farm business, but they are important to lenders for two reasons. First, lenders want to know if income from a farm will be more than the expenses. Secondly, will a producer be able to pay bills on time?
While producers generally know when bills are due and production will be ready for market, input costs and production sales prices often are entered as estimates on cash-flow budgets – and these can vary greatly. As a result, many producers update cash-flow projections quarterly or even monthly.
The steps outlined below are key to helping you and your lender understand your cash flow for the year.
Inventory any production on hand, whether it is crops in storage or market livestock. If you have a recent balance sheet, these would be in current assets. Next, estimate when and for how much you might sell that production. If you’ve already contracted part of the production, enter the quantity, delivery period and price for that portion. For any remaining production, producers often pencil in the current futures price (adjusted for their local basis) for the month in which they expect to deliver production.
Next, include line items for other income, such as government payments of any kind, crop insurance indemnity, custom work, farm rent paid to you, interest, etc. Sales of capital assets, if any, would have a line of their own. Separately, add any short-term and long-term loans you have made that will be repaid. Finally, include any non-farm income that applies to your operation.
Calculate your operating costs. For crops, this includes seed, fertilizer/lime, chemicals, crop insurance, drying costs, and any custom hire or machinery rental. A case can be made that an amount should be set aside for marketing—an advisory or information service, brokerage fees, etc.
If you have livestock, include any purchased crops/feed, purchased livestock, vet and health product costs and marketing expenses.
Next, enter fixed expenses, overhead, or other expenses not allocated to a specific enterprise. Examples include real estate taxes; cash rent; hired labor; machinery repairs, upkeep, fuel and lubrication; and equipment leases.
Purchases of capital assets (total for the year) warrant a line item.
Also on the debit side is financing: accounts payable, short-term notes due, long-term loan payments and any installment contract payments.
Finally, include an estimate of taxes due and family living expenses—unless family living is financed from off-farm income. If the manager doesn’t draw a salary, a “return to management” and/or a profit target should be included, as should any planned off-farm investments.
The resulting calculation of income minus expenses lets you know whether your business will cash flow. Looking at the different time periods tells you whether you need to move income into specific months to cover expenses.
AgriPoint® includes an annual cash-flow budget tool that is free to customers of Frontier Farm Credit. It does not allow entries by month, but its drop-down menus help categorize income and expenses. Kansas State University offers detailed crop and livestock budgets.